Selling a business can be a difficult process, which includes everything from preparation to valuation to closing the deal. Along the way, there are plenty of questions almost all business owners have. To help, we’ve answered the 12 most common questions you’ll likely ask during the business sale process.
One of the most important things you can do when selling your business is to get a business valuation to make sure you’re not leaving anything on the table. Business Exits, who sponsored this article, offers a free business valuation when you partner with them to sell your business. Getting the most from your business starts with getting a professional valuation.
Getting answers to the following questions is essential if you want to successfully sell your business. For your convenience, we’ve included a free checklist you can download to make sure you ask each one during your sales process.
The 12 questions you should ask when selling your business include the following:
1. What Do I Need to Do Before Finding a Buyer?
When you’re preparing to sell your business, preparation is the key. You’ll need to eliminate as much debt as you possibly can, gather all of your important financial documents for potential buyers to analyze, and discover any potential weaknesses. This will help you maximize the overall value of your business and speed up your sale process.
Pay Off Business Debt
The more debt you can pay off the better your financials will look to potential buyers. Showing debt on your books might turn off a lot of people from even considering the business. And for those interested in the business even with the debt, they’ll typically offer you a lower purchase price than if the debt wasn’t there.
There’s a good chance that you’ll be asked by the buyer to pay off any debt with proceeds from the sale anyway, so you might as well take care of it now. It might make cash tight until you sell, but this is actually beneficial since it’ll force you to tighten your company’s budget, increase your working capital, and therefore increase the business’s overall valuation, offsetting much of the cash you use to pay off the debt.
Organize Financial Information
Experienced buyers want to see that you’re prepared for the sale before they take a look at your business. You’ll need to make sure your books are clean and look good. You should also provide projections of at least 3 – 5 years, showing future opportunities for the business to succeed. If you can’t give them the financial information they need or get it for them quickly, they’ll likely move on to the next opportunity.
According to Jock Purtle, Founder of Business Exits:
“Get your financials in order before you try to find a buyer. This includes having your business tax returns for the most recent years completed and readily available. The #1 deal killer today is not having good bookkeeping or accounting.”
Many businesses prepare a data room online that securely keeps all of the business’s financial information for potential buyers to see. This helps you keep all of your data organized and gives potential buyers the ability to look at it within minutes. All you have to do is grant them access to the room.
Every business has weaknesses, and potential buyers will be quick to point them out. The best way to deal with them is to shore them up before you sell. If you can’t, then you need to be upfront about any potential weaknesses and provide a plan on how to potentially overcome them.
Trying to hide weaknesses will just create uneasiness for buyers when they’re discovered. Plus, your potential buyers may not understand how to overcome these issues if they’re not experienced in the industry. Dealing with these issues early or providing a plan for overcoming them will give buyers more comfort confidence with your business.
2. How Long Does Selling a Business Take?
Every business sale is different, and it’s hard to know exactly how long your business will take to sell. On average, businesses take at least 6-9 months to sell, starting from the time you actively start looking for a buyer. To be safe, a rule of thumb is that you can assume a year from the start of the process to the completed sale of your business.
A recent survey from BizBuySell found that 54% of brokers are saw businesses from 2007 – 2016 sell in 6-11 months. The length of time isn’t necessarily tied to finding a qualified buyer. The same survey found that, according to business brokers, more than half of potential buyers are qualified and able to close the transaction. It’s just a matter of finding the right buyer for your business, which can routinely take up to a year.
Keep in mind that the length of time it takes to sell your business will change based on many things. While 6-9 months is a good estimate overall, your industry, location, financial performance, and the current economic conditions will all play a factor in getting a buyer to close an acquisition.
3. Should I Offer Seller Financing?
Businesses that are owner financed almost always sell better than those that aren’t. In addition, businesses that offer seller financing often sell for 10-15% higher than businesses that do not, although it is more about opportunities to close the deal than actually adding value.
With seller financing, you can expect to finance around 60-70% of the sales price, with the rest as an upfront payment. Terms generally last 5-7 years and 6-10% is a common interest rate. When you provide seller financing, you are making a decision to trust that the new buyer has the ability to run the business effectively and pay off the loan.
More more information on how it works and how you can offer it, check out our guide on seller financing.
4. How Much is My Business Worth?
The best way to determine your business’ value is to use the method of multiplying your seller’s discretionary earnings (SDE) by your industry multiplier. These industry multipliers typically range from 2-5x or more and are dependent on the specific industry you operate within. The more opportunity an industry has, the higher the multiplier.
According to Jock Purtle, Founder of the business brokerage Business Exits:
“Overall, a business’s valuation is a combination of the company’s ability to produce future cash flow and the market value for the business’s industry or product.”
Partnering with a business broker can help you attract buyers, and they can help you properly value your business. A full valuation study could cost $10,000 or more, but Business Exits is a business broker that will give you a free business valuation. They’re experts at valuing and selling businesses and can help you get started down the sales path after you fill out an online form, which takes just a few minutes.
5. What Documents Do I Need to Show Potential Buyers?
These are high-level financial documents that give potential buyers an indication of your success and will tell them off the bat whether they’re interested in your business or not. You should limit this information to just a few key documents because you don’t want to divulge too much proprietary information until you know the buyer is qualified.
Here are the 5 main documents you should have ready to show potential buyers first:
YTD Income Statement
The year to date (YTD) income statement shows your business’s revenues, costs of goods sold (COGS), operating expenses, as well as operating profits and net profits. This is the document potential buyers will look at when assessing profitability and valuing the business using industry multipliers.
YTD Balance Sheet
The year to date (YTD) balance sheet breaks down your business’ assets (equipment, money owed business, goodwill) and liabilities (loans, debts, liens, other money business owes). Having this document ready gives your buyers a one-stop resource for seeing the assets and debt of the business.
YTD Cash Flow Statement
Your cash flow statement is basically a breakdown of all the money that comes in and goes out of the business, including net gain. You’ll see your operating, investing, and financing cash flow for your business which can answer a lot of potential questions your buyers will have. And it tells the buyer how much working capital the business actually has to work with each month, which is what really matters.
Tax Returns For the Last 3 Years
Buyers are going to want to confirm that you have filed and paid taxes for the business. Also, they will look at revenue, net income, and tax payment numbers to confirm that the financial statistics you’ve provided them with your financial statements are correct.
Summary Book of Your Business
You or your business broker should put all of the above information in a deal summary deck or book. You should include a summary and explanation of the business and even list out how you stack up against your competition. Anything that makes your business look great should be included.
6. What Documents Should I Show Buyers Who Start Due Diligence?
When you have a buyer that advances to the due diligence stage, you’ll be required to open up your books and provide them with the remaining pieces of financial information. You shouldn’t worry about giving this up as long as you’ve made the buyer sign a non-disclosure agreement (NDA). The information requested during due diligence will vary by buyer, industry, and the concerns of each individual business.
Here are the most important documents that you need to have ready for due diligence:
- Proof of Business Ownership
- Business Licenses
- Payroll Summaries for 1 Year
- Outstanding accounts payable
- Outstanding accounts receivable
- Current Loan Documentation
- Lease Contracts
- Sales Contracts
- Details of All Chargebacks or “Owner’s Salary” in Your Financials
- 3 Years of profit and loss statements
- 3 Years of cash flow statements
- 3 Years of balance sheets
You may not have all of these documents available during the sale process. If that’s true, then you should be prepared to give a reason why to any potential buyers.
7. Should I Hire a Broker or Sell the Business Myself?
There is not an easy answer to this question. A good business broker can be a great help. However, business brokers can be costly and you might be able to line up a buyer on your own. Knowing when to use a broker really depends on your own expertise, the complication of your business, and how much you can afford to pay a broker.
When To Hire a Broker
Generally, hiring a broker is a good idea if you don’t mind paying them out of your sale proceeds. We recommend hiring a broker as long as you can afford to pay one. You’ll typically know this by combing your broker’s fee with your outstanding business debts and subtracting that number from your potential sales price.
Your broker’s fee will be around 10% of your final sales price. While this may sound steep to some, the business broker earns their money by helping you get a price you may not be able to get on your own. They also help you avoid costly mistakes, which could cost you time and money. Plus they have access to potential buyers that you don’t. Paying 10% is a lot better of an option than not getting the business sold at all.
Here are the 4 times you need to hire a broker:
- If you don’t have a good idea of where to find potential buyers.
- If you don’t know what your business is worth.
- If your business network is not very extensive.
- If the extra time it will take you to sell the business will cause the business to suffer
A business broker can help you through the entire sales process. While selling your business yourself is an option, it isn’t advised unless you’re an experienced deal professional. Your broker likely has years of experience in finding qualified buyers and navigating any trouble that might come up, which can help you get the most at closing.
Using a business broker, like Business Exits, helps you maximize the value you receive at closing. They offer a free business valuation to help you know what your business is worth before you sell, so you don’t take less. Business Exits can also eliminate potential mistakes you could make during the sales process. This could put more money in your pocket and prevent you from paying for mistakes later.
When Not to Use a Broker
If you have a buyer lined up or already have an organization like a franchisor or an industry association that will help you find a buyer, you may not need a broker. In these rare circumstances, it’s best to hire other deal professionals, such as attorneys, to help protect your interests.
These are the reasons you may not need to hire a broker:
- If you’re a franchisee and your franchisor will help you find a buyer.
- If you are well connected throughout your industry and already have potential buyers lined up.
- If you can shop your business around and run it at the same time.
- If you don’t want to pay the broker 10% or more of your business’s sale price.
Seller’s are almost always the ones that pay the business broker. In most cases, business brokers charge a 10% or more commission rate on successful sales. So, let’s say your business sells for $175,000. If you use a broker, you are looking at $17,500 or more in broker fees. However, without the broker then you may not get the sale at all.
We recommend that most business owners hire a broker like Business Exits to help them through the process. They already have a large buyer pool waiting for the right small business opportunity to purchase, and they offer a free business valuation. Both of these things can help you maximize your sales price, putting more money in your pocket.
8. Who Else Can Help Me Sell My Business?
Regardless of whether or not you hire a broker, you certainly do not want to be doing everything on your own. At a minimum, you’ll likely need both a financial a legal expert to help protect your personal interests in the transaction. You may also want to hire investment bankers or M&A consultants if your business is making over $1 million in profit every year.
Certified Public Accountant
CPA’s are an important part of the business selling team. Make sure you hire an accountant who knows your business or has had previous experience preparing a business to sell. A good CPA will help you get all your business financials in order and help you navigate all of the financial aspects of the process.
An experienced attorney will be an invaluable asset as you navigate all the legal factors that go along with selling a business. If you hire a qualified attorney, you don’t have to worry about drafting contracts and agreements. They handle all of the legal drafting for you, keeping your best interests in mind.
If you’re a bigger business that makes $1 million or more in annual profits, then you may need to hire an investment banker instead of a business broker. These are deal professionals that are experienced in discreetly finding buyers for large businesses. They typically handle the entire process, including negotiations with all buyers.
Consultants like M&A intermediaries can help you with any aspect of the sale process. They help you through each step of the process as you work towards closing with a potential buyer. From deciding on a sale price to drafting the closing documentation, they can hold your hand through everything related to selling your business.
9. How Do I Qualify a Buyer?
Before you start down the path of negotiating with a potential buyer, you’ll likely want to gauge their interest and financial capacity before you try to close the transaction. We’ve put together three ways you can take to weed-out those with only casual interest. If a buyer makes it past these, there is a better chance he/she is seriously considering your business.
Sign an NDA
A non-disclosure agreement is a legal document signed by both seller and buyer in which both parties agree to keep each other’s private/financial information confidential. A buyer who is willing to sign this agreement is at least interested enough in your business to sign a legally binding contract.
Ask for Buyer’s Personal Financial Summary and Credit Score
If the nondisclosure agreement did not scare away a non-serious buyer, this should. If a buyer is willing to provide sensitive personal financial information to you, he or she probably has more than just casual interest in your business. This will also weed out any potential buyers that are wanting to pitch the purchase to other buyers they find for a fee, instead of purchasing the business themselves.
Set Deadlines and Stick to Them
If a potential buyer wants to buy the business, they’ll be more than willing to set deadlines for things like making an offer, signing any contracts, and closing the deal. If they can’t stick to deadlines like these, then you shouldn’t waste your time focusing on them as they’re much less likely to actually close the deal.
10. What Agreements or Contracts Do Buyers Need to Sign?
Different industries will sometimes require different agreements or contracts. However, at a minimum, you’ll need to start with an NDA for potential buyers and draft a purchase agreement to close the transaction. Some of the contracts you may need to draft include:
- Non-Disclosure Agreement
- Letter of Intent
- Purchase Agreement
- Assignment of Leases
- Assignment of Licenses
- Seller Financing Agreement
- Succession Agreements for Employee Benefit Plans
- Transfer of Patents, Trademarks, Copyrights, etc..
- Seller Consulting Agreement
- Asset Acquisition Statement
- Transfer of Contracts
You’ll also need to draft other documents that aren’t contracts, like your closing details sheet, which both buyer and seller will need to sign off on before closing.
11. How Long Does it Take to Close Once I Find a Buyer?
The length of time it takes to close depends on your buyer, how complicated your business is, and how extensive your negotiations are. Generally, you can expect 30-90 days for due diligence, 30-60 additional days for negotiations, and another 30-60 days to draft all contracts and close the transaction.
Very rarely does a business close in less than 90 days total. Instead, it can take anywhere from 90 – 210 days before you realize your sale. If your business is complicated, or you’re in a risky industry, then your sale process could take a year or more.
12. What Happens Once My Business is Sold?
With many small business sales, the owner’s job is not done once the business is sold. Often, the buyer will want you to remain on for a certain period of time to help him/her take over the new business and become familiar with its operations. There are generally two ways this is done.
Owner Stays on as a Business Employee
In this model, you stay on as a business employee for a specified period of time. If you want to help transition the business and still have access to business benefits such as insurance, 401(k), salary, etc, then you will want to see if you can set this kind of deal.
This is the most common transition. Typically, the owner will stay on as an employee for up to 2+ years, often incentivized by additional payouts or equity. The reason for this is that most businesses have intricate operations that the owner knows how to best operate. The 2 years is usually spent as a knowledge transfer and as a way to make the transition more seamless.
Owner is Paid as Independent Business Consultant
Another way to transition a small business is for the buyer to pay the seller an independent consulting fee for a certain period of time. In this scenario, you get paid a set monthly fee, regardless of how often you were actually called on to help. In return, you agree to provide a certain number of hours of consultation a month. In this case, transitions can take anywhere from 1 month to 1 year.
In some rare circumstances, you may find a buyer that is interested in owning the company but not running it. They may ask you to continue running it as if nothing has changed, other than who’s ultimately in charge. Ultimately, any agreement should be discussed prior to closing and you should get in writing the exact expectations of both you and the buyer.
Tax Events and Financial Planning
No matter what you decide to do in regards to working with the business after closing, you’ll have a lump sum of cash you’re receiving. There will be tax implications you should be aware of, and you need to prepare for what to do with your money when you get it.
When you sell your business the money will go to paying off any outstanding debts that the buyer didn’t agree to take, and then you’ll have a profit left over. That profit will be a capital gain, which will be taxable income on your personal tax return. If you’ve owned the business for more than 1 year then you’ll likely face a 15% tax, but if you’re in the highest tax bracket then the tax will increase to 20%. You should prepare for this tax with a CPA before you close.
The sale of a business could net you a significant amount of money at closing. If that’s the case, then you should be prepared to save or invest it in accounts that will benefit your long-term financial goals. A financial planner or CPA can help set you up to achieve those goals by investing the money at closing or by putting the money away in tax beneficial savings or retirement accounts.
Selling a business can be a difficult process that takes months to complete. If you do it wrong then you could struggle to find the right buyer, or you could cost yourself unnecessary time and money. Knowing the right answers to the most common questions can help you avoid those mistakes.
Knowing the right value of your business is one of the most important answers you need when selling a business. Business Exits is a business broker who can not only help you find the right buyer for your business, but they also offer a free business valuation. You can get started online in only a few minutes.